Truist Financial Corp (TFC) 2020 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Fourth Quarter 2020 Earnings Conference. As a reminder, this event is being recorded. And it is now my pleasure to introduce your host, Mr. Ryan Richards, Director of Investor Relations for Truist Financial Corporation.

Thank you, Abby, and good morning, everyone. We appreciate you joining our call today where our Chairman and CEO, Kelly King; President and COO, Bill Rogers; and CFO, Daryl Bible, will highlight a number of strategic priorities and discuss Truist's fourth quarter 2020 results. Chris Henson, Head of Banking and Insurance; and Clarke Starnes, our Chief Risk Officer, will also participate in the Q&A portion of our call.

We are conducting our call today from different locations to help protect our executives and teammates. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slides 2 and 3 of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP.

With that, I will turn it over to Kelly.

Thank you, Ryan, and good morning, everybody. Thank you very much for joining our call. We really appreciate that. And I would say, overall, this quarter and this year are very good given the challenging environment that we face.

We had a continued focus on our strong culture. It's activating very, very well. We're executing well on our revenue synergies. We had really effective expense focus. And we made appropriate investments for the future and importantly, supported our teammates in difficult environment, and kept our clients and communities number one.

Our purpose is to inspire and build better lives and communities. And we think in the times we live in today, this is more important than ever. We focus on our mission. We focus on our values. I will point out to you that with regard to our values, ultimately, we focus most of our attention over the happiness of our teammates in the challenging environment that we face today, helping people get through the challenges they're living with at home and at work and all of the various difficulties that people are going through. Finding happiness in this environment is a very, very important undertaking, and we work hard to try to help that be possible for our teammates.

If you're following along on the slides, let's go to Slide 5. I just want to point out that it's nice to say -- pardon me, that you have a culture, it's nice to say you have an important purpose, but it's more important to live it. So I just want to point out a few of the things that we have done that I'm proud of in terms of living our purpose.

During the course of the year, we launched our Seeds of Hope program, where we helped our teammates with money to go out and actually do little projects, little things to help people in need. We launched our Truist One Team theme -- fund, our homepage program. Our Truist Cares program was very effective, where we invested over $50 million to meet the immediate and long-term needs of our communities, our clients and our teammates.

We provided over $100 million in special COVID support for our teammates and 750,000 client accommodations; $13 billion in PPP loans, which funded help for more than 80,000 companies and created -- protected about 3 million jobs. And we did 355 small- to medium-sized grants in our communities. I'm very proud of our $60 billion 3-year community benefits program. I would say to you, we are ahead of the time schedule in terms of making those investments.

We supported those who are historically underrepresented through a 700 -- I mean $780 million commitment. That investment includes $40 million in helping establish an organization called CornerSquare Community Capital, which is focused specifically on CDFIs in the minority space. And we're proud that we were able to invest $20 million over 3 years to support HBCUs and their students.

On Slide 6, let's talk a little bit about where we are with the merger. I want to make a point of context for you with regard to how we think about our merger because it's a bit different than most mergers. This is very different than many, many mergers I've been through in my career.

We're not just putting 2 big companies together here, cutting expenses and trying to improve profitability in the short term. Rather, we're building what I call a new bank. We're building a bank based on the best of both -- from both organizations. And in some cases, just new systems and processes. Like, for example, in our commercial lending area, we're taking the very new and very best-in-class SunTrust and senior loan origination program and the BB&T back-end system in terms of commercial loans.

So combined, we have the best from both sides in this classical case where a 2 plus 2 equals 5. We certainly could have picked one. It would have been cheaper. It would have been faster. But it would not have been better, and it would not have been client focused.

Daryl is going to be talking to you about our merger charges and other merger expenses a little later. But I just want to emphasize that as he does that, remember that you have the normal [mercks] that we called out early on in the announcement. That's normal signage and different systems that are just going away. They're being [dried]. They have no future benefit. They really are just a merger charge.

And then we have these other investments, which I call investments because they are. They're investments in the future. They're making our organization better. It's client focused. And while they will not be in our own growing long-term run rate, these are investments that we make today to be sure that we have an agile, very client-focused organization as we go forward.

You see there are a number of accomplishments for 2020. I'd just point out a couple of those. Very importantly, we've made great progress in our culture. We cannot feel better about that. We established our brand and visual identity. We successfully merged first digital conversion, we believe, in terms of modern days in Truist Securities. Activated our Integrated Relationship Management process, which is pivotal to our success.

We did consolidate 104 branches, leveraging our blended branch program, which is innovative. Remember, we did divest $2.3 billion in deposits, about 30 branches. And there have been a lot of corporate backroom functions that have been integrated, including audit, risk, legal, finance and others.

And we importantly did a huge amount of work on appropriate job regrading for our teammates. Daryl will comment with regard to some -- cost with regard to that. But this was a very important process in terms of making sure that our teammates, through the year, knew that we were going to do the right thing in terms of looking at the new responsibilities, establishing the right kind of job and appropriate compensation. And we chose to make that retroactive for them during 2020, because it was the right thing to do. They were doing the job. We just had not had a chance yet to properly grade the compensation and that served us very, very well.

In terms of '21, just a few points here. Everybody tends to focus on the core branch conversion, which, as you know, is in the first half of '22. That is very, very important, make no mistake. But look, there are a huge amount of conversions and other activities going on in '20. '20 is a really big conversion year.

We will complete our wealth brokerage conversion. We'll have a mortgage conversion, Salesforce conversion. We'll be closing an additional 226 branches in the first quarter. We'll be implementing our digital first migration, supporting our T3 concept in terms of meeting our clients' needs on a seamless basis, integrating technology in Truist to yield a high level of trust.

And so there are a lot of activities that are going on during the course of the year. So I just don't want you to be thinking there is not much going to be happening in Truist with regard to conversion for the first half of '22 because, frankly, most of the hard work will be done by the end of this year, and then we'll actually execute on the final branch closures and conversions as we head into '22.

Looking at a few highlights with regard to our performance on Slide 7. I'm very excited about our revenue. Total taxable equivalent revenue of $5.6 billion, up 5.5% annualized versus the fourth quarter. That was really driven by stable net interest income, strong fee income, especially in investment banking and trading income, strong insurance performance. Chris will talk about that as we get the questions in Q&A. And very proud of 5 insurance acquisitions just in the fourth quarter alone. And we expect more activity as we head into '21.

A very strong adjusted net income available to common shareholders of $1.6 billion. We had diluted earnings per share of $1.18, a diluted return on average assets of 1.35% and a very strong adjusted return on average tangible common equity of 19.03%. So you can see, we're well on the way to top performance and all the metrics that we projected when the deal was announced, which is kind of miracle, which you know has been 2 years. There's a lot been going on. But we're still tracking and doing really well in terms of hitting that top performance level of metrics as we expected that we would.

Daryl is going to be commenting on some capital issues. I'll just point out to you that we -- our Board did approve up to $2 billion in common stock repurchases, which we saw in the first quarter. We have outstanding credit quality performance, much better than expected. And our common equity tier 1 is exactly right on 10%, which is what we have projected a couple of years ago.

On Slide 8, I'll just point out to you the unusual items for this quarter. And you can see there, we have the regular merger charges. And as I related to you earlier, the incremental operating expenses are not in the long-term run rate, and they equated to $0.28, so a drag with regard to GAAP versus adjusted.

So that's a quick look at the early highlights. Let me now turn it to Bill for some focus on some key areas. Bill?

Great. Thank you, Kelly, and good morning, everybody. As Kelly just noted, Truist is the first large bank merger in the digital edge. And with that in mind, we determined it was really imperative that our clients begin to experience an enhanced digital platform this year, and this is demonstrated on Page 9.

While our foundation is 2 leading digital experiences, we're going to accelerate the delivery of features like personalized financial insights, AI-driven chat box, other client-centric enhancements. We're going to pilot this in both platforms in the second quarter, and then we'll begin migration in waves in the third quarter and complete full migration to a premier Truist experience for our digital clients by year-end. So emphasizing Kelly's point of how much is being done this year.

As you can see on Page 10, we're experiencing excellent digital adoption and usage from our clients. So for the 12 months through November, we experienced a 26% increase in digital sales, 12% growth in active mobile users, 22% increase in mobile check deposits, and a 5% increase in statement suppression. I think all would speak to increased digital adoption.

Now this is an area where we're already seeing the benefits from our investment. And on the right side, we show some recent enhancements. So for instance, the SunTrust business online and mobile experience incorporates significant updates, and it was built in-house to give us more control over the app's functionality and performance long term.

The heritage award-winning BB&T U platform now provides insights to help clients better manage new spending and behaviors, including an end-of-month cash flow and analysis and enhanced notifications just to name a few, and very consistent with our whole T3 premise.

This is a prime example of what Kelly talked about, best of both. Using BB&T U client-driven front end and a more flexible agile heritage SunTrust-driven back end, this clearly positions us, I think, really well for the future. We believe initiatives such as these underscore our commitment to improve the lives of our clients and demonstrate our investment effectiveness.

So let's turn to Page 11. We experienced further decline in balances across most loan categories in the face of continued economic uncertainty and elevated liquidity. Average total loans decreased $7.6 billion, largely attributable to commercial loan balances and ongoing runoff in the residential mortgage portfolio.

In commercial, average balances declined $5.4 billion, primarily due to line paydowns and lower utilization. Paydown activity reflected larger clients' ability to obtain financing from capital markets, and SunTrust securities is well positioned to assist them, which you'll see later.

Commercial balances were also impacted by a $1.4 billion reduction in PPP loans and the transfer of $1 billion in assets to held for sale following our decision to exit a small ticket loan to lease portfolio.

We experienced a rebound within our dealer floor plan clients after bottoming in July due to OEM supply chain disruptions. Dealer floor plan balance has steadily improved as new core inventories were replenished. We also saw a growth in mortgage warehouse lending and government finance.

Commercial activity remains bifurcated as a whole with a greater share coming from large and medium-sized companies than from smaller businesses. And consumer average balances decreased $2.2 billion. This was largely due to seasonality and refinance activity that resulted in lower residential mortgage, residential home equity and direct loan balances.

Average balances in our indirect auto portfolio increased $1.1 billion. Loan production was really strong as vehicle sales rebounded, especially for us in the prime segment.

Overall, we remain cautiously optimistic. We're hopeful that the successful rollout of COVID-19 vaccines together with additional government stimulus will increase visibility, revive confidence and support the economic recovery, all of which will be essential for loan growth. We're extremely well positioned in businesses and markets that we will believe will most benefit from this.

So let's continue on Page 12 and look at deposits. Deposit trends remained favorable during the quarter. Growth was robust and broad based, supported by a combination of seasonal inflows and ongoing growth resulting from pandemic-related client behavior.

Average noninterest-bearing and interest checking balances were each up over $3 billion, while money market and savings grew $1.1 billion. Average time deposits decreased $4.3 billion, primarily due to the maturity of wholesale negotiable CDs and higher cost personal and business accounts.

Importantly, we were able to achieve a strong level of deposit growth while maximizing the value proposition to clients outside of rate paid. For instance, the average total deposit cost decreased 3 basis points to 7 basis points, and average interest-bearing deposit cost declined 4 basis points to 11 basis points.

So with that, let me turn it over to Daryl to discuss our financial performance for the quarter.

Thank you, Bill, and good morning, everybody.

Turning to Slide 13. In the fourth quarter, reported net interest margin decreased 2 basis points to 3.08%, reflecting lower purchase accounting accretion. Core net interest margin was unchanged at 2.72%. Core margin benefited from higher yields on PPP payoffs, recognition of deferred interest on loans and lower funding costs, offset by excess liquidity.

Earning assets rose $3 billion, primarily due to an increase in deposits, resulting in a modest improvement in net interest income. We partially hedged our exposure to rising rates by adding pay-fixed swaps to offset market risks associated with our investment securities.

The chart on the bottom left shows an increase in our asset sensitivity due to core deposit growth, additional pay-fixed swaps and the residential mortgage runoff, which is partially offset by the growth in the investment portfolio.

Turning to Slide 14. Our Integrated Relationship Management strategy is helping improve fee income. Noninterest income increased $179 million, if you exclude third quarter security gains of $104 million. We had record investment banking and trading income of $308 million due to strong activity in M&A and loan syndications, lower counterparty reserves and improved trading profits.

We also generated record commercial real estate income of $123 million, driven by structured real estate transactions and strong production and sales activity at Grandbridge. Insurance income grew 7% versus fourth quarter of '19 due to strong production and premium growth as well as acquisitions. Organic growth was 2.9%. If you exclude the Truist policy placed last year, organic growth was 4.9%.

We completed 5 insurance acquisitions during the fourth quarter, which we expect will add more than $110 million in annual revenue and approximately $7 million in adjusted expense.

Turning to Slide 15. Noninterest expense increased $78 million, reflecting a $99 million increase in merger costs. Adjusted noninterest expense rose $27 million due to higher professional fees for strategic technology projects and higher personnel expense.

Personnel expense increased $50 million, reflecting higher incentives related to strong revenue production and the impact of our job regrading process, which concluded late last year. Job regrading resulted in a fourth quarter catch up in personnel expense. Approximately $60 million of this was related to prior quarters. Through this effort, we were able to honor our commitment to establish jobs and rewards programs that harmonizes all teammates in the combined framework.

FTEs decreased 1,300 during the quarter and were down 8% since the merger was announced. We closed 104 branches during the quarter, bringing the full year total to 149. Net occupancy decreased $26 million, benefiting from aggressive closures of non-branch facilities.

Turning to Slide 16. As we said, we are seizing the opportunity to build best of both franchise. This approach is harder than a typical acquisition, but we believe the benefits to our clients justify the effort.

Since the merger was announced, we have incurred $1.2 billion of merger-related and restructuring expenses. These expenses have no future benefits and are not part of the post-conversion run rate. We also incurred $725 million of incremental operating expenses related to the merger. These expenses do provide future benefits and are integral to building the best of both franchise.

The incremental operating expenses are not part of future runway and will end after the conversions in 2022. Based on our integration plan, we expect a merger-related and restructuring charges of approximately $2.1 billion and a total incremental operating expenses of approximately $1.8 billion. This results in a combined total charges of approximately $4 billion.

Turning to Slide 17. Strong credit performance was characterized by minimal increase in NPAs and an excellent loss experience resulting in lower provision expense. We saw favorable trends in problem loan formation as the criticized and classified loans decreased 8.4%. The provision of $177 million benefited from lower charge-offs and a modest reduction in reserves. Due to the decision to exit the small ticket loan and lease portfolio, the allowance coverage ratio remained strong at 7.15x net charge-offs and 4.39x nonperforming loans.

Active accommodations were down significantly since the second quarter. Approximately 97% of the commercial clients and 91% of the consumer clients who exited the accommodation program are current on their loans. Our exposure to COVID-sensitive industry decreased 2.6% to $27.1 billion or approximately 9% of outstanding loans.

We also had the third lowest loss rate among peers in the latest CCAR test. We believe this outcome reflects prudent client selection and underwriting as well as diversification from the merger.

Turning to Slide 18. The allowance for credit losses decreased $30 million, largely due to moving the $1 billion portfolio into held for sale. Our macro assumptions include unemployment remaining fairly stable through mid-2021 and improving thereafter, and GDP recovery in pre-COVID levels by late 2021. We also layer in qualitative adjustments for COVID-related uncertainty. Continued improvement in the economic activity, lessened uncertainty and stabilization of criticized assets may prompt us to release reserves in the coming quarters.

Turning to Slide 19. Our capital ratios were relatively stable, with the CET1 ratio unchanged at 10%. We declared a common dividend of $0.45 per share, and a dividend and total payout ratios of 49.4%. In December, the Board authorized the repurchase of up to $2 billion of the company's common stock, starting in the first quarter.

Our intention is to maintain an approximate 10% CET1 ratio after taking into account strategic actions, stock repurchases and changes in risk-weighted assets. For the first quarter, we expect to repurchase approximately $500 million.

The Board authorized other measures to optimize our capital position, including the redemption of the outstanding Series F and G preferred stock. And liquidity remains strong, and we are prepared to meet the funding needs of our clients.

Turning to Slide 20. This slide highlights our progress towards achieving the $1.6 billion in net cost saves. Our efforts to reduce third-party spend are ahead of expectations. We are now targeting 10% reduction in sourceable spend of $4.5 billion. In retail banking, we closed 149 branches in 2020. On a cumulative basis, we expect to close 800 branches by the first of 2022, including more than 400 branches by the end of 2021.

We also expect to reduce our non-branch footprint by approximately 4.8 million square feet through the combination of closures and downsizings. Through December 31, we reduced our non-branch footprint by approximately 2.4 million square feet, so we are roughly halfway to our goal. The remaining facilities will be rationalized during 2021.

Cost base from technology are highly dependent on core bank conversions because we can't decommission systems or data centers until the conversions are complete.

The bottom of the slide lists where we are making significant investments. We believe these investments are critical to delivering on our purpose and providing a touch plus technology equals trust approach to clients.

Turning to Slide 21. The waterfall on the left shows how we did relative to our 2020 cost savings target. Our objective for 2020 was to achieve annualized fourth quarter net cost saves of $640 million or 40% of the $1.6 billion target. This equates to the fourth quarter adjusted noninterest expense of $3.040 billion or less.

We adjusted noninterest expense of $3.174 billion, exceeded our target, included catch up in expenses related to job grading, commissions on higher revenue and the nonqualified expenses which are substantially offset in other income. If you exclude these items, adjusted noninterest expense would come in slightly below target.

As you can see from the slide, we are maintaining our medium-term targets and reaffirming our cost-saving targets for 2021 and 2022. For 2021, our targeted fourth quarter adjusted expense would be $2.940 billion, excluding acquisitions.

Now I will provide guidance for the first quarter, expressed in changes from the prior quarter. While the environment remains fluid, we continue to see momentum in our businesses, which may enable us to outperform the guidance. The first quarter has fewer number of days and seasonally higher personnel costs.

We expect taxable equivalent revenue to be down 3% to 5% as a result of fewer days and purchase accounting runoff. We expect our reported net interest margin to be down 2 to 4 basis points based on less purchase accounting accretion and a change in the core margin. We expect core margin to be relatively stable with the exception of increased liquidity coming from the balance sheet. This could pressure the margin up to 5 basis points.

Noninterest expense adjusted for merger costs and amortization is expected to be down 2% to 4%. We also anticipate net charge-offs in the range of 30 to 45 basis points. Overall, we had a strong quarter with exceptional revenue growth, good margin performance and expense management and strong asset quality.

Now let me turn it back to Kelly for closing remarks and Q&A.

Kelly, you are on mute.

Let me just close with a few comments with regard to the Truist value proposition, which is to optimize our long-term total shareholder return, really through a focus on strong capital, strong liquidity and diversification and intense client focus. We believe we can do that because we have an exceptional franchise with diverse products, services and markets.

We are the sixth largest commercial bank in the United States. We have strong market share in the most vibrant, fast-growing MSAs from the Southeast and the Mid-Atlantic area. We are uniquely positioned to deliver best-in-class efficiency and returns, while we continue to invest in the future.

We are very committed, as Daryl said, to reaching our $1.6 billion of net cost savings. We have a really great mix of complementary businesses that allows us to expand our client base through our yield-enhancing revenue synergies. We have a very strong capital and liquidity position, as Daryl described, which positions us to be resilient as we go through the very challenging times that we are experiencing.

We are, as I said earlier, building a best-in-class new bank which is designed to be client-focused, purpose-driven and resolutely committed to inspiring and building better lives and communities. We believe our best days are ahead for Truist and these great United States of America.

I'll turn it back over to Ryan.

Thank you, Kelly. Abby, at this time, will you please explain how our listeners can participate in the Q&A session?

(Operator Instructions) We will take our first question from John Pancari with Evercore ISI.

Regarding the $1.8 billion in incremental operating expenses, can you just talk about that? Like how that number has evolved versus your original expectation? I know it's the first time you're giving us that target. So how does that compare to what you originally expected? And how it's evolved over time?

And then can you give us a little bit more of your thought process behind it in terms of if we could continue to see upward pressure on that amount? Are you pretty confident in the $1.8 billion and that it's going to remain at that target?

Yes, John, thanks for that question. I would tell you when we were putting the transaction together in late '18 and announcement early '19, we thought $2 billion was the merger and restructuring charges, and we're pretty much on target with that.

As we continued to work on all the integrations and we saw the opportunity to really build the best-in-breed of what we could do with our systems and technologies, we just knew that we would basically be having, I would call it, a lot of technology projects on steroids all at once, and that this would be a really unusual time to have all that cost running through our expense structure.

So that's really what we came up with. And we've been tracking it to date so far, and we feel pretty good about the forecast that we have. We're almost at $2 billion in total when you combine both charges that both the merger and restructuring and the incremental. So we have about $2 billion to go over the next 1.5 years. But we believe it was for the right reasons and makes all the sense, and it's going to help our clients and really produce good performance for our company going forward.

So John, a way to think about that conceptually is that, that $1.8 billion is really, as I think about it, like a capital allocation for future benefits in terms of client focus and better systems and better processes. So it will flow through expenses. We'll continue to report it to you. Also you can think about it more in terms of an investment.

Got it. That's helpful. And then separately, on the branch and non-branch real estate reduction, I just want to confirm that those reductions that you're targeting and the savings that come from that, that is included in your targeted cost savings tied to the merger?

Absolutely. Yes. So we came up with the 5 buckets. You're talking about 2 of the buckets. I mean the retail branches, we said, originally would be between 700 and 800 branches. You can see we're at the high end of that original estimate. That will be done by the first quarter of '22. And then on corporate real estate, even before COVID, when you put these 2 companies together, we have huge duplication all throughout the Mid-Atlantic and Southeast.

So just going through and rationalizing that space, I will tell you, COVID has helped us in a number of ways in that it's emptied out the buildings, so we can move quicker in the consolidation. And my guess is, as we continue to make these combinations, that we may actually exceed what we originally estimated in real -- corporate real estate consolidations because of COVID and just behaviors of people working at home.

Right. That was exactly what I was getting at because I'm assuming some of the corporate real estate reduction opportunity got bigger, that you got -- you saw a greater opportunity as COVID set in. So I was just wondering if that could present upside to your cost saving expectations if corporate real estate reductions can be more than you thought?

Yes. So we have a plan for what we're executing now on the $4.8 billion. Once we complete that plan, I'm sure Kelly and Bill, and executive leadership will reevaluate it and see if there's opportunity to do more in the future.

We will take our next question from Betsy Graseck with Morgan Stanley.

Betsy?

Betsy, we can't hear you.

Betsy, you are on mute.

Hello? It's Betsy. Can you hear me now?

Yes.

All right. Sorry about that. Yes. So I had a couple of questions. One, just on the Integrated Relationship Management strategy. I'm wondering how that's progressing. The revenues are strong this quarter, particularly in fees. And so I just wanted to understand how much was the IRM helping to drive that result this quarter?

Well, Betsy, that's a huge part of it. And I'll let Bill give you some deep color with regard to that. But this is a concept of really integrating the way we focus on the client. Many institutions focus on a siloed way in terms of products and different services. And we don't do that. We focus on the whole needs of the client.

And so we've developed this IRM process, we call it, Integrated Relationship Management, over really several decades. And it's very, very effective, very efficient because everybody owns a client. Everybody is focused on meeting all the needs of the client all the time. And we're seeing spectacular early positive feedback in terms of how it's working, especially between the Community Bank and CIG.

Bill, you might want to comment on that?

Thanks, Betsy. I mean this is one of the really strong cultural alignments that Kelly and I talked about when we first started talking about this merger, is this commitment to put the client first and create a culture and a structure that evolves from that. And we're seeing it. I mean -- and the model is working.

As Kelly noted, a couple of examples and the investment banking outperformance this quarter, in particular. I mean there was really just great contribution from our Commercial Community Bank and from our CRE and from our private wealth businesses.

So that model of Integrated Relationship Management is working. It's just been great adoption, great participation, really good cultural alignment. You see it in the insurance numbers. You see it in the wealth numbers. So it's all part of this structure and focus.

And we have lots of discipline around it. But the key is the cultural side. Our people committed to wanting to work together, and work together towards a common goal to meet client needs. And I'd say this quarter was probably one of the better examples of how the engine is really firing on all cylinders.

Okay. All right. I appreciate that. The [fees] really jumped out on the screen. I guess the follow-up question on the expense line here is around -- some of the core expense inflation outside of the cost saves. You've got merit increases, bolt-on acquisitions, investments for revenue growth, et cetera.

I'm just wondering how investors should think about where the total expense dollars will likely land post the net cost saves? What kind of guidance can you help us with there?

So Betsy, let me just mention. In general, we have the itemized areas you've listed. But we are really focusing on expenses in a broader conceptual approach. We're doing the obvious. I mean the obvious are, you got 2 of these, you only need 1, and those kinds of things that are just kind of happening. But we're heading into a period now where it's time for us to focus on optimization, it's time for us to focus on transformation and reconceptualizing the business because so far what we've basically done is to think about it is put 2 big banks together.

Now what we have -- and we get a lot of savings from that, just natural overlap. But now we have the opportunity to reconceptualize the business as we transform it post COVID and all that's going on with regard to the new digital world. And there are enormous opportunities for us as we go through '21. So '21 is going to be an intense year of focus on expenses from the perspective of transforming our structures so that we are doing the right things in terms of investments and expense allocations to meet the client's needs first. And we believe that will throw off positive benefits in terms of expenses.

Betsy, what I would say, in my prepared remarks, I gave for the fourth quarter of this year, the $2.940 billion, now that excludes the merger and restructuring charges, the incremental MOE expenses, amortization. And then I gave a call out on the expenses for the insurance acquisitions of about $70 million adjusted expenses.

So all that will get carved out of that base. But when you look at like the job regrading, we're considering that part of the investment. That's something that we are covering with our net saves.

And we will take our next question from Matt O'Connor with Deutsche Bank.

Can you talk about the timing of liquidity deployment this past quarter? Obviously, securities went up a lot. It sounds like you had some of that. But what made you decide kind of now is the right time?

We've seen the 10-year move up, but actually mortgage rates and I think rates on the types of securities that you would have bought were probably stable or down. And most people, I think, are expecting higher rates later this year. So what kind of drove you to deploy what seems like most of your excess liquidity this past quarter?

So Matt, ideally, we would like to take this excess liquidity that we have and deploy it in loans. What we're seeing is that we just have a fair amount of payoffs in the PPP. But as the businesses really come back and have a lot of momentum and start growing as we get into the middle and later half of '21, we really want to deploy that excess liquidity and lending.

I would say that we decided to put some of that liquidity into the investment portfolio. We did that throughout the third quarter. We did partial heads up -- hedges on them basically to help with the mark-to-market on that. So when we added about $25 billion, $30 billion to the investment portfolio, we did have hedges on there about $20 billion that we put on to help with the market risk that we have. So net-net, we feel good with what we've done.

The real uncertainty on a go-forward basis with all these new stimulus packages is we could get potentially another $10 billion or $20 billion more liquidity into the balance sheet. I think we need to evaluate what we do with that excess liquidity, whether we keep it at the Fed or invest it or ideally blend it out, which is the main primary objective.

Okay. That's helpful. And then just circling back on the incremental costs related to the deal. Obviously, you've been incurring these already and sized it, I think, for the first time, which is getting a lot of attention. But how will we see these on the other side right?

So like you didn't increase the net cost saves. You haven't really sized revenue synergies, even though it certainly seems like there will be some. How will we see the payback of that incremental $1.8 billion, if you can break that out somehow?

So Matt, these, as I was describing, are really investments. So think about this as we are building a whole new commercial loan delivery system, a whole new mortgage loan delivery system. You will see the benefit of that in terms of -- in some cases, just more efficient systems those are newer. And the other is the effectiveness in terms of meeting clients' needs so we can -- for example, on mortgage, you can just do more mortgages because you're more efficient. You get more mortgage applications because you have a better client experience.

So it's just like if your car is kind of run down and run out with 200,000 miles, you buy a new car and you make an investment, you see the benefit of that in terms of driving experiences, less breakdowns, et cetera, et cetera. So it is an investment. That is the best way I can describe it to you to think about.

We will take our next question from Erika Najarian with Bank of America.

My first question is on revenues. Kelly, you were very upbeat on the future of this company. And your peers were actually quite upbeat on the future of economic growth. And I'm wondering as we think about going past the first quarter, how should we think about your base case for economic recovery relative to loan growth, which was -- where your peers were surprisingly upbeat and also specific to you, the insurance outlook?

Yes. Erika, we are upbeat as well. I've said, and I'll take a second why I am upbeat with regard to the economy. This economic downturn is dramatically different than what we've all experienced in the past. If you take the '90 correction, it was about our commercial real estate bubble. 2000 was a technology bubble, 2008 was the residential real estate bubble.

There was no bubble here. There was nothing fundamentally wrong with the economy. In fact, we had 10 years of robust growth. You have very, very low inflation. We just shut it off. That's important because that we're not underlying in pending issues that caused the economy to spur. Now if you kept it shut off for 10 years, you'd have another issue. But given where we are with the vaccines, et cetera, we fully expect that you're most likely to see a stronger snapback in the economy than most people expect.

When we talk to our clients and prospects, they are really pretty upbeat. They're saying things like it's time to get on with it. We're ready to go, we're making investments, and we're seeing that in terms of our robust pipeline of loan reversal activity.

And so we are upbeat with regard to the economy. We think it will be slower in the first part, picking up steam as you get through the mid part. Stimulus will have that sign. But mostly, businesses and consumers feeling more confident. Look, when the vaccines are out there, we say oh, and as they become more widespread in terms of being injected, fear goes down, confidence goes up. People are ready to live again. People are ready to invest, are ready to run their businesses.

So I fully expect by the time we head towards the fall and end of the year, you're going to be really surprised in terms of how robust this economy is. That will show up in terms of commercial loan activity in a very big way. You'll likely see more residential loan growth than we would have expected in a slower economy. And certainly, you'll see it in terms of insurance activity as well.

And let me just turn quickly to Chris Henson and let him give you some color with regard to insurance because it's very important.

Yes. Thanks, Kelly, and Erika, thank you for the question. So maybe just hit sort of fourth quarter, maybe just the outlook, to your point.

One of the best quarters that we have had in some time. And driver -- all the drivers of organic growth are really kind of hitting on all cylinders. Client retention has stabilized in retail at north of 90% for the last 8 months, wholesale really strong at 85%. We're really seeing, because of the factors in the market, standard carriers are pushing risk to the wholesale market, and we're benefiting from that.

Pricing, another element of organic growth, as strong as -- we're in the hardest market we've seen in 2 decades. Rates are up in the industry, north of 7%, and it's anticipated that we'll continue to see some hardening and acceleration into '21.

Our new business -- new business in 2019 was up in the 12% to 13%. That was as good as we've seen. Then we hit COVID, and we were kind of negative 4% to 6%. Didn't know where the year was going to shake out. But this quarter, our new business was up 19.5%, up 8% year-to-date, some of the best numbers I have ever seen.

So that all led to an organic growth number that we reported, 2.9% to like quarter, 4.3% year-to-date. But just to key in on one point Daryl made, I think it's really important, the 2.9% growth number was really negatively impacted by onetime MOE-related piece of insurance that was booked for our MOE deal in Q4 '19. So if you exclude that noise, organic growth really would have been on a core basis 4.9%.

In terms of outlook, we expect first quarter commissions to be up in the 10% range. We're moving from our third best quarter of the year to our second best and first. Obviously, uncertainties in COVID may impact the economy. But the outlook is really strong given the accelerated pricing. Exposure units in the business are holding. We're growing excess and surplus lines because of the shift that I mentioned in the standard cares that support retail, pushing it to E&S, and we're really benefiting from that diversification.

And the pricing momentum. If you think about the markets digest and the COVID impacts, cat losses, we had 30 storms this year, the most in history in any given year. And 3 of the largest years in history of cat losses have occurred in the last 4 years. So it's got upward pressure. And then lower interest rates, which puts pressure on investment income for underwriters.

So pricing up 7%. You're seeing examples of things like umbrella and excess, up 12.5%, D&O up 11.5%. Property, which we have a lot of, up 9%. Up in all classes, all accounts. So looking forward, what we're expecting is -- in first quarter is somewhere around the 5% kind of organic growth rate number. And we think that the elevated catastrophe level, low interest rates, all that's really going to keep it propped up.

And Kelly mentioned acquisitions. We were able to close 5 in the fourth quarter, and we expect more in 2021. So really bullish about the insurance going forward.

Got it. That's very helpful. My second question is a 2 parter on expenses. Daryl, if you could maybe briefly describe what's in that $1.8 billion number that would assure your investors that it doesn't linger in the run rate? I think everybody gets scared when you see personnel as a descriptor.

And going back to Slide 21, as a follow-up question to that and a follow-up question to Betsy's question. What do we do with that 3.037 number that annualizes to 12.16, as we think about your 2023 run rate. Is that a base for the run rate that includes a savings plus a growth rate? Just help us think about -- how to think about that number for 2023?

So I'll start on the latter question first. So it's pretty simple. We basically gave you the guidance for fourth quarter of '21, which was the $2.940 billion. In there, that excludes the restructuring, MOE, amortization and acquisitions. That's it. So that's the number we are targeting to get for fourth quarter of '21. That's pretty simple. And then that will continue on in '22 when we get all the cost savings to the net $1.6 billion.

Your other question on '21 was -- what was the question again on the first part?

Yes. If you could describe the types of expenses you're incurring in that $1.8 billion…

Yes. It's the technology projects. And so the expenses that we can carve out are onetime products, like when we decommission something or something is put out of use, from that perspective has no future benefit that's in the original merger and restructuring charges. But when you have developers going in and you have people going in with systems and you have architects building out our new in Zebulon, they're basically building a whole new Truist environment and technology.

All those are real costs. We're doing all these technology costs all at once. All that has future benefit. We would typically not carve that out of the merger and restructuring because it's basically just the culmination of doing a lot of technology projects all at once. We just thought it was fair to call out because you would never really think of doing this all at once if it wasn't for the merger.

But as Kelly said, at the end of the day, we're going to have a much better client experience. We're going to have much better performance overall, and you should see the benefits of all these systems integrated by doing the best between each of the systems that I think you have a lot of revenue and other synergies going forward.

Erika, keep in mind what Daryl emphasized. When you're doing those projects, you bring all these consultants in, but you also get them out. So with regard to consultants, we have a narrow front door and a very big back door. And I'm guarding the backdoor.

We will take our next question from Bill Carcache with Wolfe Research.

I had a question on back book repricing dynamics and how to think about that from here. For legacy BB&T and other banks more broadly, we saw downward pressure on loan yields persist throughout the last [SERP] cycle despite having a steeper curve. Can you discuss whether that downward pressure on yields is a dynamic you'd expect to persist throughout the remainder of this SERP cycle as well?

Bill, I would say, in a normal balance sheet structure, that would make a fair amount of sense. What we have going on in our balance sheet, remember we have some purchase accounting, we have PPP and all that. We actually saw our yields, you can see that on our tables. You can see that we actually had loan yields higher for those various reasons.

That said, I would tell you the steepening of the curve, we are asset sensitive, we're asset sensitive across the curve, a little bit more short end than longer end. But as the yield curve shifts, we will benefit from that. A 25 basis point steepening of the curve will basically give us 2 to 3 basis points in core margin. So that is a phenomenon.

If you look at how things are going on and off on a pure basis, actually looked at credit spreads going on, our commercial credit spreads are going on maybe at 3 or 4 basis points higher than what they are coming off. At so I think all that is relatively good from that perspective.

Yes. And Bill, I think to Daryl's point, that's also a business mix and focus issue. So what would sort of be traditionally a different back book look on a forward basis, as Daryl noted, I mean we're seeing improvement in margin. That has to do with focused type of relationships, value that we're adding, all those type of things. And he noted, you see that particularly in the commercial side.

Understood. That's very helpful. And just a quick follow-up on that same question. To the extent that PPP 1.0 and then 2.0 are going to be sort of contributing to the NIM in this [SERP] cycle, can you discuss how long you would expect those tailwinds to persist through '21 and then not '22? Or would they carry into '22 as well?

Daryl, maybe you want to cover that one?

Chris, do you want to start this one? And I'll finish off.

Sure. Yes, we do obviously plan to participate in round 2 probably in the neighborhood of $3 billion or so. We see most of round 1 playing out through '21. And round 2 probably coming in the first half of the year and then rolling out the back half of the year. Really hard to call exactly when -- what quarter exactly that all is going to flow out. But to answer your question, though, I would say 90-plus percent of it should be gone by the end of '21.

The thing I would just add to that, though, is that it has a huge impact, obviously, on core margin depending on when the forgiveness happens. And it could be anywhere from 3 to 5 basis points, depending on the amount that actually happens in a given quarter. One thing to note, round 2 is really focused on more smaller loans. So those actually drive higher fees. Like our average fee on round 1 was about 2.7. Our estimate -- this is just an estimate because it's just now starting to roll out. We might see north of 5% fees on round 2. That will have less volume, but it will also have a huge impact when those actually are forgiven as well.

And just to give you a sense, we've invited 100% of round 1 to apply for forgiveness, but they submit information at different times. We've received and proposed on to SBA about 40% of that to this point. So some of the timing is really determined by the timing of the client providing the information.

And we will take our next question from Ken Usdin with Jefferies.

Wondering if, Daryl, you could provide us a little more color on that commentary you gave about the first quarter revenue outlook. I believe you said down 3% to 5% FTE.

Can you help us understand just what Chris gave some color on insurance, but kind of the bifurcation between what you expect out of NII and fees? And what the drivers would be, especially in those other fee areas in addition to insurance?

Yes, I'll be happy to do that. So when you look at margin, because we have the difference between our reported margin and core margin, we are going to have less over time accretable yield going into our margin. Now that's volatile. I would say that, that could be down anywhere from 2 to 4 basis points of less accretable yield that impacts reported margin on a quarterly basis. So that trends down. It's just how much is down as it kind of goes back and forth from that.

From a core margin perspective, our core margin is actually holding up really well. We've done really well this last couple of quarters with that. The uncertainty we have is that how much more liquidity are we going to get into the balance sheet. And liquidity in the balance sheet pressures core margin. If we decide to invest the liquidity in securities, it gives us a little bit more NII. If you leave it at the Fed, you basically just tread water on NII.

So we have to make those decisions as we go forward. But depending on how much liquidity we gain with these stimulus packages, core margin could be a little bit volatile. I think you have to move to -- shift to net interest income and focus on net interest income and what the impacts are until that noise gets out of there.

On the fee side, I would just tell you that the businesses have a lot of momentum. Insurance always is very strong in the first quarter. It's usually their strongest quarter. But if you look at BOE's area, in investment banking and trading, huge pipelines they had and kind of filled in the fourth quarter.

And if Kelly is right, with the economy, he could have a great quarter. In Joe's world in wealth, they have a lot of momentum. They're adding new accounts. In our retail area, they have traction. Our Community Bank commercial -- actually is growing commercial loans when you look at the detail.

I don't know if Bill or Chris want to comment on the momentums we got on revenue on those businesses?

I think -- Daryl. I mean if we look at things like pipelines going forward and production in the fourth quarter, we have a reason to be optimistic. That's against a headwind, though, of PPP, paydowns and utilization being a sort of actually uniquely low level. So I think the things that we can control, production pipelines are doing well. And then I think we'll see the benefit of that over time. Whether that manifests itself in the first quarter, second, third or fourth will be dependent upon all the things Kelly talked about (technical difficulty) confidence and market acceptance of where we are.

Yes. I might just add opportunities we're seeing really for growth. Auto is very strong right now. We were up about $1 billion in average balances. We see that continuing into the first part of the year. Mortgage warehouse lending because of the environment also very, very strong.

Got it. Great. And just one more follow-up on that $2.940 billion number, Daryl. So that's -- seems like to be a real landing point that you're targeting before the $70 million quarterly -- quarterly version of the $70 million of insurance adds just to get to the base.

Would that $2.940 billion also be inclusive of incentive comp or core underlying cost inflation? It's an absolute goal that you're trying to get to around that number before we add the acquisitions and other stuff?

Our hope, to be honest with you, is that our fee income is so strong and all that, that I'm going to have to tell you, it's meaningful and have to carve it out like we did this past quarter. That would be actually a great story to tell you. So we will continue to try to carve out when we think it makes sense to carve out that variable comp.

Obviously, we're a dynamic company and things are moving. But just to be sure everybody understands, we are not changing our commitment. We're not backing away from the $1.6 billion that we made in February '19. We're going to get those cost savings.

And we will take our final question from Mike Mayo with Wells Fargo Securities.

Just back on the merger savings, $1.6 billion, you're reiterating that net number, that's pretty clear. But -- I mean you have 40% of the savings already and only 12% of the branch closures. You expect to exceed on the non-branch footprint part. So why not increase that estimate? What would it take for you to increase that estimate of $1.6 billion net? Or have you already increased the gross merger saving number, which you haven't given to us and reinvesting some of the proceeds? And does that all add up to positive operating leverage in 2021 or not? You didn't quite guide for the year.

So Mike, you're right. I mean there are many parts that move into this. And we're really just trying to anchor on the minimum of the $1.6 billion. We're not trying to hold out what we think is possible in terms of beating that. But some of the things I've talked about in terms of -- I mean we can have more branch closures than we've anticipated. We are not predicting that right at this moment, but that's certainly a possibility.

We certainly are going to be intensely focused on expense optimization. And there are huge opportunities for duplication across enterprise, areas that we can technologically invest in and reduce ongoing expense run rate. So the $1.6 billion related to basically putting the 2 companies together.

The other things we do more in terms of transformation and additional opportunities we find, whether it's a non-branch office space, maybe we see that target, maybe we've got a few more branches. We certainly are very optimistic in terms -- and expect to focus on doing that. We just want to be clear about what we've said we can do and then hold out the opportunity that we can probably complete that.

Okay. Without using up my second question, in terms of a gross number, I know that you're investing a lot back. But is your gross number going higher as part of that net?

Go ahead, Daryl.

So I will tell you, we are investing more than what we originally thought, Mike. But we think these are the right investments that we're making in our people, technology, digital, all for the right reasons. So we are making more investments than what we originally thought. We don't -- haven't communicated that number publicly. But just know that we are going to get our net savings. Maybe we'll exceed it at some point, but let us get to $1.6 billion first.

And right now, we are making a lot of investments in the company as we are moving forward. And you're seeing it in the results. When you look at our revenues, look at our account growth that we're getting, I mean we're doing really, really well in the midst of a lot of conversions which could really distract a lot of the businesses. We are performing at a very high level.

And then the second question, a lot of talk about fees, a lot of talk about insurance. I'm bringing in the big guns, it's my peer colleague and my firm's insurance analyst, Elyse Greenspan. I know she's spoken with the insurance managers at your firm before. But Elyse, if you want to ask a question on my behalf, go ahead.

Yes. So the one question I had, you guys posted 5% adjusted organic growth in the fourth quarter, which seems like a pretty impressive number relative to some of the other companies I cover and then also given kind of the impact that we've seen from COVID on the industry. As you guys think about 2021 from some of your other comments, it seems like growth would continue on an organic basis, right, kind of -- should come in above that 5%.

If you could just maybe expand there? And then also, could you give us a sense, you guys, a little bit different than others, obviously, have good tilt of wholesale and retail in your insurance business as the organic from both of those businesses, has one been outperforming versus the other? Or are they kind of consistent?

Thanks for the question. This is Chris. You're right, we did finish around 5%. And based on what I see now, I think around 5% would be certainly a good number for, call it, the first half of next year. We'll call the last half when we get a quarter in or so.

So I feel very, very good about it. But I must tell you, if pricing holds, and I believe that it will, and if the economy does begin to turn via vaccinations getting pushed out to the contrary, and we're able to see then better new business growth as a result. Some example of what we saw this fourth quarter. Could it be better? I think it's possible that it could.

So I think the opportunity really kind of all the cylinders have opportunity to move. I do think the growth is going to be dependent upon what happens with COVID and the economy, and we kind of get all that going. But assuming we do get vaccination out midyear, stimulus first half of the year, I think it bodes well for organic growth in that business for sure.

And your question about, is the margin better in one than the other? Strategically, as a bank, the reason we want exposure to both -- if we weren't a bank, it probably wouldn't matter as much. But what we're really interested in is for this business to provide good downside protection when credit markets are challenging. And you can see it this year -- this past year, 4.3% organic growth for the year, I think, is pretty solid given the backdrop.

And the reason we do that is because wholesale or retail are going to operate indifferent to each other. So you're going to, depending on whether you're in hard or soft market, one is going to help balance the other out. We're interested in the combination of the growth there. So certainly, a little bit better contribution from wholesale today than retail, but they're both making nice contributions.

And ladies and gentlemen, that is all the time we have for questions. I would like to turn the conference back to Mr. Ryan Richards for any additional or closing remarks.

Okay. That completes the Q&A portion of our call. Thank you, Abby, and thank you, everyone, for joining us today. I apologize to those with questions that we didn't have time to get to. We will reach out to you later today. And we wish you all the best. Goodbye.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.